Office supply chains bullish on future - Brief Article - Statistical Data Included

DSN Retailing Today, March 25, 2002 by Molly Prior

NEW YORK -- As unemployment rates rose during the latter half of 2001, sales at office supply superstores slid downward. Yet despite this reduced demand in the category, the major office supply players are remaining bullish for the immediate future and are reporting upbeat outlooks for 2002.

Office Depot, Staples and OfficeMax took a more conservative approach to their businesses last year, focusing their efforts on controlling costs and improving efficiencies in store operations. By the start of 2002, all three retailers had rolled out smaller-format stores, tailored SKU assortments and jettisoned underperforming stores.

As a result, balance sheets and fourth quarter results positively reflected the rationalized approach to a slowdown in capacity in the office supplies industry.

Despite soft sales, each of the players reported upbeat outlooks for the full year. Industry leader Office Depot's sales dipped 3.6% to 11.5 billion from $11.57 billion a year earlier. Ceo Bruce Nelson said that while its North America retail segment struggled due to a challenging economic environment, the retailer continues to see improving comps, adding that the first quarter of 2002 marks the fifth consecutive quarter of improvement. Nelson cited technology, which accounts for 25% of North American sales, as a drag on same store stores.

"Our performance in the next six months of 2002 will primarily be driven by gross margin improvement over the last year and continued emphasis on efficiency and cost controls," the company stated.

During a Bear Stearns retail conference last February, Nelson admitted to market saturation in several markets, such as Atlanta, Ga. But added that because the top three players control 20% of a market projected for 3% to 4% annual growth, "there's still room to grow." Office Depot is projecting positive low-single-digit comps for 2002.

The office retailer sees much more attractive growth opportunities internationally "One day, our company's total revenue will reflect that," said Nelson. The company is planning to open 25 to 30 North American stores this year and 10 to 15 stores in France and Germany.

Staples, the nation's second largest office supply chain, saw revenue tick up slightly to $10.74 billion, from $10.67 a year earlier. And although comps fell 5%, ceo Ronald Sargent told investors that Staples can significantly improve returns through changing variables the retailer can internally control. "We are already seeing an improvement from strategic initiatives that we launched in 2001," he said.

Staples reported it is seeing strong results from its new Dover format. Staples plans to trim its prototype from 24,000 square feet to 20,000 square feet, further slowing square footage growth. In 2002, the chain plans to open 75 new North American stores. Its European business was profitable for the year. The retailer plans to open 20 stores in Europe and expand operations to Belgium in the second half of 2002.

Industry underdog Office-Max's financial results showed strides in key metrics, such as inventory levels, free cash flow and reduced debt. OfficeMax said it expects to return to profitability next year. Ceo Michael Feuer said he expects focused marketing initiatives and a focus on profitable stores to drive sales growth. "Fueling gains will be our new state-of-the-art infrastructure, better store execution and out 'Max Means More' marketing strategies."

"Though we would still like to see stores close at an even faster rate, the office products sector is benefiting from a more rational approach to the business," wrote UBS Warburg in a research note. "Demand, therefore, has a fighting chance to catch up with supply."

Office supply chains flaunt their portfolios

After a yearlong focus on efficiency and cost control, the 2001 balance
sheets of the big three office supply retailers are beginning to show
signs of improvement. Among the leading indicators of a rebound in the
category is a strong showing in operating income, which reveals
improvement, if only relative, over the tough results from fiscal year
2000.

OFFICE DEPOT

             1999        2000        2001

Sales:       $11.2 B     11.5 B      10.2 B
Op. Profit:  354.0 M     110.22 M    413.37 M
Net Income:  201.0 M     49.33 M     257.63 M

STAPLES

             1999        2000        2001

Sales:       $10.74 B    10.67 B     8.93 B
Op. Profit:  430.84 M    244.18 M    516.37 M
Net Income:  264.97 M    59.71 M     314.98 M

OFFICEMAX

             1999        2000        2001

Sales:       $4.63 B     5.15 B      4.84 B
Op. Profit:  (188.28 M)  (193.6 M)   32.4 M
Net Income:  (295.82 M)  (133.16 M)  10.01 M

( )represents loss

Source: Company reports and DSN Retailing Today research